Bank Indonesia (BI) will make a room for credit provision
(translated from Bisnis Indonesia newspaper, Friday, 22 September 2006)
Bank Indonesia will make a room for regulations concerning credit provision refer to debtor rating result, as an implementation of Basel II principles and as an incentive for a bank that implement a proper risk management.
The Director of Banking Research and Regulation BI, Muliaman D. Hadad explained that debtor with a good rating is beneficial for bank because their credit provision is zero. For a debtor with a bad rating, even have no rating, the credit provision is 100% from their credit disbursement.
BI requires providing rating by an independent institution or by internal bank’s rating. For internal bank’s rating, there should be a standardization method that are agree on and use by all banks.
Muliaman explained that this policy have already implemented in several countries. However, he deflects possibility that Bank Indonesia will require debtor rating as a requirement for credit disbursing.
Debtor rating is a normal procedure, a same procedure with a business entity that will issue a bond and obtain rating from an independent rating institution. Bank may not conduct debtor rating but credit provision that have to be borne by the bank is 100%.
Pursuant to OECD Export Credit Agency, the current credit risk in Indonesia and Philippine are categorized as level 5 with 100% risk weight. As comparison, Singapore categorize as level 1 with 0% risk weight, while Malaysia, China, Hong Kong and Hungarian are categorize as level 2 with 20% risk weight.
Senior Analyst of Directorate of Banking Research and Regulations Bank Indonesia, Wimboh Santoso, added that bank could calculate their risk weight asset based on debtor rating. If banks have credit quality from their good debtor, it will automatically strengthen their capital. If debtor has an AAA rating, the risk weight is only 20%. It means, bank do not have to form 100% credit provision.
The Central Bank will monitor the rating result from the independent rating institutions or by internal bank’s rating, for ensuring credibility of the rating institutions.
The Vice President of World Bank, Marilou Uy said that Basel II, which stressing on risk management, would directly become an incentive for strengthening a good and transparence corporate governance.
Implementations of Basel II have several challenges, especially related with capability of the supervisor and risk management in each bank. A supervisor must have an excellent condition on knowledge and field implementation because they have to review the bank’s process in calculating risk.
On December, the Central Bank will issue a consultative paper on implementation of Basel II, concerning capital adequacy ratio, supervision and market discipline level; adjusted with characteristics and obstacles face by national banking industry. Trial of the said consultative paper will be conducted on 2007, while the regulations will be issued on 2008.
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